For banks, this could mean running vaults, partnering on vaults, or providing infrastructure for vaults that aggregate lender deposits and extend credit to diverse counterparties. These structures can blend secured, collateralized loans with unsecured loans based on credit ratings. This approach promises higher yields and offers a pathway to materially improve return on capital (ROC) by avoiding some of the capital-intensive drawbacks of bilateral lending. Drawing on financial principles and regulatory frameworks, this article explores the limitations of current bank lending models and how vault curation could improve profitability.

What Is a Vault? A Primer for Wall Street Professionals

For those on Wall Street accustomed to structured products, asset-backed securities, and private credit funds, a “vault” in the DeFi context is essentially a digitally native pooled investment vehicle. It functions like a managed fund or securitization tranche, with greater automation and transparency. Think of it as a hedge fund strategy wrapped in a smart contract. Investors, or lenders, deposit capital into the vault. That capital is then managed by a curator, either manually or algorithmically, and deployed across a mix of lending opportunities.

Those lending opportunities can be secured by collateral, such as overcollateralized loans that resemble repo-style arrangements. They can also be unsecured, with allocations based on credit ratings, similar to a corporate bond sleeve. The curator, often a bank or asset manager, optimizes for risk-adjusted returns and typically charges performance fees. The structure may also provide liquidity options and real-time visibility through blockchain ledgers.

Unlike traditional bilateral loans, vaults diversify exposure across counterparties, reduce concentration, and scale more efficiently. In that sense, vaults resemble how CLOs bundle loans to improve capital efficiency. In practice, vaults often target yields in the mid-single digits and higher, drawing parallels to private debt funds while potentially reducing operational overhead through on-chain execution. This setup can appeal to institutional players seeking alpha without the balance-sheet expansion that comes with direct lending.

The Current Bank Lending Model: Borrow Cheap, Lend Varied, but Capital-Constrained

Banks traditionally operate on a straightforward but nuanced model. They borrow funds from investors or depositors on an unsecured basis at rates close to benchmarks like the Secured Overnight Financing Rate (SOFR), which reflects low-risk overnight borrowing collateralized by U.S. Treasuries. These funds are then lent out to a wide range of counterparties, from high-credit-quality corporations to riskier small businesses or consumers, through products spanning secured asset-based loans and unsecured credit lines.

On the surface, the borrow-low, lend-high dynamic appears highly profitable. Net interest margin, the difference between interest earned and interest paid, can look attractive, particularly when lending rates sit several percentage points above funding costs. A middle-market direct lending book, for example, can price at levels that suggest strong headline returns.

The catch is the regulatory overlay. When banks lend, each exposure attracts a capital charge tied to risk-weighted assets under frameworks like Basel III. Banks must hold minimum capital against those risk-weighted assets, and the market often pressures them to carry even higher buffers than the floor. Riskier loans increase risk weights, which increases required capital, which reduces the effective return on equity and return on required capital.

The result is that a model that looks extremely profitable when viewed as a simple spread trade can look materially less attractive once capital intensity is accounted for. Higher capital requirements can also constrain growth by limiting balance sheet capacity unless the bank raises new equity or pursues capital relief structures.

The Capital Charge Dilemma: Stability vs. Returns

Basel III emphasizes higher-quality capital and additional buffers designed to make banks more resilient. That resilience comes with trade-offs. Equity is typically more expensive than debt, so higher equity requirements can increase the weighted average cost of funding and compress ROE. Banks operating close to minimum ratios may respond by shrinking balance sheets, issuing equity that dilutes returns, or using capital relief transactions such as significant risk transfer (SRT) structures.

Well-capitalized and well-managed banks can offset some of this with lower funding costs that come from being perceived as safer. Even so, the central tension remains: capital charges can transform a lending model that appears lucrative into one where returns on required capital are less compelling. That pressure is one reason banks keep searching for structures that preserve economics while using balance sheet capacity more efficiently.

Vault Curation: A Bridge from DeFi to Traditional Banking

Vault curation in DeFi involves professional managers designing and optimizing vaults. These are smart contract-based pools that aggregate deposits and deploy them into yield-generating strategies such as lending or liquidity provision. Curators set risk profiles, allocate across markets, and earn fees that are often performance-based. Depositors receive risk-adjusted yields that reflect the vault’s strategy and market conditions.

For banks, adapting this model can mean curating vaults that pool investor capital and lend to counterparties via secured and unsecured channels. For banks that are capital constrained, a vault model can be a way to keep growing credit activity without expanding risk-weighted assets in the same way as bilateral lending. The structure also aligns with a shift toward more fee-based businesses, similar to how banks originate, arrange, or service assets in securitizations and private credit ecosystems rather than holding everything on balance sheet.

How Vaults Boost Profits and Reduce Capital Drag

The core premise is that moving from bilateral lending to pooled, structured models can reduce capital intensity while maintaining attractive yields. In a vault setup, lenders deposit into a curated pool that extends credit to diversified counterparties. Senior exposure can be secured by collateral, while junior or supplementary exposure can be unsecured based on credit rating or underwriting.

This resembles securitization logic. Pooling diversifies exposure, collateral can protect senior allocations, and the structure can enable risk transfer if designed within regulatory parameters. When risk transfer is effective, risk-weighted assets can fall compared to holding loans directly. In parallel, banks can earn curation and servicing fees, and they can potentially participate economically without bearing the full principal credit exposure that drives capital charges.

Vaults can also give banks flexibility. Strategy performance can vary daily, and short-lived dislocations can create periods where yields are unusually high. A bank that can deploy capital opportunistically, subject to internal hurdles and risk limits, can treat this as a tactical liquidity option and withdraw as yields normalize.

In addition, curated risk bands, ranging from conservative to frontier, can be designed to align with regulatory expectations around transparency and risk management. Done properly, that alignment can support better outcomes on both supervision and economics.

Addressing Lender Comfort in the Vault Model

Many lenders already trust banks through deposits and bank-managed investment products. Vaults can be positioned as an extension of familiar pooled vehicles, including collective investment funds, mutual funds, and private credit pools. That familiarity is likely to translate well for institutional and high-net-worth lenders who value professional oversight and diversification.

Retail lenders may hesitate at first if the product leans into DeFi language or smart contract mechanics. Banks can reduce friction by emphasizing the familiar parts: risk bands, disclosures, diversification, and governance. Positioning vaults as “white-glove” bank products that happen to use on-chain rails can make adoption feel incremental rather than radical.

To build confidence without adding heavy cost overlays, banks can focus on practical trust levers. They can lead with compliance and plain-language disclosure, including clear descriptions of collateral, underwriting, and liquidity terms. They can invest in security practices like third-party audits and live monitoring of smart contract risks. They can also launch pilots with transparent reporting, building a track record before expanding distribution.

Banks can also pursue external validation. Ratings from major agencies are not yet standard for vaults, but banks can prepare for that direction by building rating-ready reporting, documentation, and governance as the market matures.

Sentora: Uniquely Positioned to Help Banks Curate Vaults

As banks explore vault curation, partnering with established DeFi platforms can accelerate adoption while improving sophistication and operational readiness. Sentora, formed from the 2025 merger of IntoTheBlock’s analytics and Trident Digital’s structured liquidity expertise, positions itself as an institutional platform for this transition. It offers non-custodial vault infrastructure, integrates real-time risk analysis, and focuses on enterprise-grade security.

The appeal for banks is the ability to co-curate vaults with layered risk profiles while using analytics to stress-test strategies and monitor exposures. A bank can potentially leverage an existing platform’s tooling for multi-chain execution, structured lending, treasury operations, and stablecoin integration, reducing the need to build full-stack infrastructure internally.

Conclusion: A Strategic Imperative for Banks

As regulatory pressure mounts and fintech competitors keep expanding, vault curation offers banks a path to higher fee income, reduced capital drag, and competitive yields in a hybrid TradFi and DeFi world. By curating vaults, banks can move toward more asset-light models, partner with DeFi protocols or private credit ecosystems, and deploy capital more efficiently.

The potential outcomes are higher profitability, more flexible balance sheet usage, and a stronger position in an evolving financial landscape. Ignoring the shift risks ceding ground. Embracing it could meaningfully reshape how banks compete.

~ADM